Forex Market News and Analysis

Forex News - Dollar hits four-month high as worries over European lockdowns, U.S. taxes sap risk appetite

The dollar hit a four-month high on Wednesday as concerns over a 3rd COVID-19 wave in Europe, potential U.S. tax hikes, and escalating tensions between the West and China sapped risk appetite.

The dollar index rose to a four-month top of 92.608 in early London trade, its highest since Nov. 23.

The gauge "looks determined to check the highest end of a replacement, higher 91-93 range we expect will form in coming weeks," Westpac strategists wrote during a client note, adding that extended lockdowns in Europe have sapped confidence in an economic rebound.

"Meanwhile, the U.S. will have a powerful rebound in coming months amid a robust vaccine roll-out, stimulus payments, and economic reopenings," they said.

The index that measures the greenback's strength against a basket of peer currencies is up nearly 3% year-to-date, confounding widely held expectations among analysts for a decline.

Strategists at BCA Research said they believe the U.S. dollar is experiencing a "countertrend rally within a market ."

"Over the near-term, the dollar benefits from two supports. First, the U.S. growth will outperform because of generous economic policy and therefore the country’s lead in vaccinations. Second, the NASDAQ and other highflying global equities are correcting since February, creating some risk-off undertones that help the countercyclical greenback."

"However, the real rate of interest differentials will ultimately determine the currency’s cyclical outlook. The Fed’s commitment to maintaining an accommodative policy will cap upside to US real rates at the short-end of the curve. this may prevent a pointy appreciation within the dollar.

The euro hit a four-month low of $1.1812 after Germany extended a lockdown and urged its citizens to remain reception during the Easter holiday.

Worries over the pace of the pandemic recovery were heightened after a U.S. health agency said the AstraZeneca (NASDAQ: AZN) Plc vaccine may have included outdated information in its data.

The flight to safety received a further nudge when Treasury Secretary Janet Yellen told lawmakers that future tax hikes are going to be needed to pay for infrastructure projects and other public investments.

Yellen was testifying to the House Financial Services Committee alongside Federal Reserve Chair Jerome Powell, who reiterated that an expected near-term spike in inflation is going to be transitory.

That helped tame U.S. Treasury yields, with the benchmark sinking below 1.6% on Wednesday for the primary time during a week, because it continued its retreat from a quite one-year high of 1.7540% touched last week.

Both Yellen and Powell also are scheduled to testify to the Senate Banking Panel on Wednesday.

Human rights sanctions on China imposed by us, Europe, and Britain, which prompted retaliatory sanctions from Beijing, are adding to plug concerns.

The safe-haven yen, which gained in Asian trade, weakened 0.1% by the beginning of trading in London. Australia's dollar - considered a liquid proxy for risk - weakened further on Wednesday.

The Aussie slipped to as low as $0.7582, A level not seen since Feb. 5.

The British pound weakened as far as $1.3675, also rock bottom since early February.

In cryptocurrencies, bitcoin gained 4% to $56,500, off a record high of $61,781.83.

Seasonal factors are likely exacerbating currency moves, as some investors lock in profits before the quarter-end and therefore the holidays of Easter and Passover, consistent with Masafumi Yamamoto, the chief currency strategist at Mizuho Securities.

"The main scenario for the market, that the worldwide economy is recovering from the pandemic shock, is intact," he said.

"We may even see more of a correction into the beginning of April, but then I expect a restarting of a risk-on trade," with commodity currencies of advanced economies benefitting most, he said.

 

Forex market news sometimes giving new insight about economic development and impact on currency
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